After years of dithering, European banks are at last stepping up the pace at which they are selling off their loans and other assets to meet progressively more onerous capital requirements set by regulators in the years since the credit crisis. Last year European banks sold €91 billion ($121 billion) of loans, according to consulting and professional services firm PricewaterhouseCoopers, up more than 40 percent from the €64 billion sold in 2013.
Hedge fund firms and other alternative-investment managers warn that even as the supply has increased, however, the demand from their rivals has kept up, if not outpacing it. Victor Khosla, founder and chief investment officer at $5 billion distressed-debt investor SVP Global, thinks there are now about 50 investors buying distressed corporate loans in Europe, compared with 20 to 25 three years ago.
“The opportunity set that’s been identified by many of our peers across the investment landscape is very large,” says Simon Finn, head of European principal investments at $13.5 billion London-based alternative-asset management firm CQS. Finn has, over the past few months, built up a team of eight staffers charged with identifying buying opportunities in banking sell-offs.
Finn tends to stay away from deals involving more than €100 million ($105 million), on the ground that bigger transactions attract more competitors — thus increasing prices and pushing down yields. He notes that the recent wave of bank sell-offs in Ireland and Spain, particularly of property assets and loans, has attracted serious money. “Nearly everybody I know has been on the shuttle to Madrid over the past 24 months,” says Finn. As a result, he adds, “there’s not a great deal that takes place there without invitations going to 50 or 60 people. We don’t think that’s all that appealing.”
Finn is reticent to divulge what precisely CQS is investigating. He did mention that the firm is looking into commercial and residential real estate — both loans and the underlying assets themselves. He is seeing what he calls a “pickup in deal flow” in real estate sold by banks in France, Germany, the Benelux countries and Scandinavia. The CQS team has already made purchases from European banks and is pursuing several more deals.
In return for accepting more complex transactions, which include absorbing all the headaches associated with postacquisition management rather than outsourcing it, as many smaller investment houses do, Finn has brought on a team with a diverse set of skills, including a lawyer with mortgage enforcement and restructuring skills across pan-European markets and people who have managed real estate.
Despite the increased competition for deals, SVP Global’s Khosla says, “if you’re good and have strong local knowledge, you get a chance to pick the most promising pockets for returns.” The average price of distressed loans over the past year has been about 70 cents on the euro, higher than it was in 2012, according to Khosla. “While buying opportunities were priced lower in 2012 than they are in 2015, the volume now is much higher,” he adds. Khosla cautions against direct comparisons between the two periods because the businesses were often in worse shape in 2012, justifying lower prices.
Khosla notes that even though SVP Global’s headquarters is in Greenwich, Connecticut, much of the firm’s portfolio is invested in Europe. SVP’s funds focus on buying senior debt likely to be turned into equity as part of a restructuring. Recent investments include the acquisition of 85 percent of U.K. packaging company LINPAC Group and the purchase of the debt of Cory Environmental, a U.K. waste disposal company that is currently in restructuring talks with SVP.
Some alternative-asset management firms are skeptical of the holding power of bank sell-offs as a strategy, however. “The big trade in the deleveraging of European banks’ trade hasn’t been as exciting as everyone thought it might be,” says Patrick Badenoch, London-based head of European credit at $20 billion New York–headquartered alternative-asset management firm BlueMountain Capital Management. Badenoch attributes this to the improvement in the banks’ financial situation because of action by the European Central Bank, reducing the need for the banks to raise funds by selling assets as quickly as possible.
Badenoch adds that in situations in which European banks have sold assets, it has often been huge books of low-risk mortgages at discounts that are in many cases not deep enough for hedge fund firms and other alternative-asset managers. This is largely because new rules on leverage, which look at the ratio of core capital to assets, potentially encourage banks to sell a large value of unimpaired assets rather than a small value of riskier assets. Leverage ratios make no distinction between the relative riskiness of assets. Badenoch poses the rhetorical question: “Why sell distressed assets to a hedge fund at 50 or 60 cents on the euro when you can kick the can down the road, knowing that in a couple of years it will potentially be all right?”
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